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European Moves Bring Focus Back to Washington

After a weekend of speculation, European leaders promised to make billions of Euros available in a bid to revive bank-to-bank lending, buying stakes in financial institutions and guaranteeing loans among them. Each country will act independently under the joint framework; Germany and France were said to have plans to unveil their programs Monday.

Now investors are sure to turn their attention back to the U.S., where administration officials have already made clear that their emphasis has shifted from liquidity ?buying up problem assets — to shoring up capital at banks and other financial institutions. Treasury has made clear it plans to provide capital by taking stakes in financial companies.

But the market wants details: when, how, and which institutions, to start. A Monday morning address by Neel Kashkari, the Treasury official heading the agency’s efforts under this month’s financial rescue bill, could shed light on the matter. “The experience of the past several weeks have conditioned the market to be skeptical of vague or ambiguous solutions,” Morgan Stanley analyst Ned Rumpeltin said after the G-7 issued a broadly worded “plan of action” on Friday.

Meantime, weekend events underscored just how fluid conditions remain. New Zealand guaranteed bank deposits; Australia did too, and also said it would provide guarantees for inter-bank lending. There was talk that the London exchange could suspend trading to allow investors to absorb rescue-plan details, and that U.S. authorities might halt short-selling in stocks that see a 20% or greater decline in a day.

Then, Sunday evening, The New York Times reported that Morgan Stanley -- widely expected to be the first big bank that could seek Treasury investment -- had brought Treasury and Federal Reserve officials in to help it renegotiate a $9 billion investment from Japan's Mitsubishi UFJ Financial Group. Despite rumors late last week, the federal government wasn't expected to take a stake in Morgan Stanley, the newspaper said, but Mitsubishi was seeking better terms for the investment amid a sharp slide in Morgan Stanley's stock price; both sides sought reassurances from the Treasury that any government investment in Morgan Stanley won't wipe out Mitsubishi's.

That shows why the details are critically important when the government goes to take its equity positions: Concern that a subsequent government investment would seriously dilute existing shareholders could give potential private-sector investors another excuse to remain on the sidelines. "One view of the Great Depression is that what delayed the recovery was that companies held back investment, until they became confident that the rules were not going to change abruptly," Strategas Research Partners said in a note to investors Sunday.

Then there's the key question of which companies the government will invest in. Treasury has said its capital-injection program will be voluntary: Banks must apply to sell the government a stake. But how will Treasury determine which to help and which not to?

Officials have said they don't intend to pump taxpayer dollars into institutions likely to fail even after receiving government help. That means effectively predicting which companies will live and which will die, something notoriously tricky to do: Over time, only about 13% of banks that make the Federal Deposit Insurance Corp.'s list of troubled institutions actually go on to fail. Expect big "systemically important" institutions to get help first; there is also political pressure to include the regional banks that serve small businesses and local economies.

There is some fear that banks will prove reluctant to seek government capital, afraid doing so makes them appear shaky. That could spur the government to act first, swooping in to provide capital to key firms before being asked, in order to head of collapse.

For firms that don't meet the Treasury's survival test, expect to see government-brokered takeovers like the acquisition of a Washington Mutual by JPMorgan Chase immediately after WaMu was seized by the FDIC in late September. Such tie-ups would forestall the risk of another Lehman, where the investment-bank's collapse had widespread repercussions, contributing to American International Group's near collapse and subsequent government rescue.